Authorised Guarantee Agreement - what is it and how does it work?

What is an Authorised Guarantee Agreement?

An Authorised Guarantee Agreement (AGA) is a form of guarantee where an existing tenant of a commercial lease agrees to guarantee the tenant’s obligations if he/she/they transfer the lease part way through. It is common for the lease terms to provide that the outgoing tenant must enter into the AGA. Notwithstanding this is may be possible to still negotiate the terms.

An AGA acts as a safety net for landlords, offering an additional layer of security in case the new tenant (assignee) defaults on their lease obligations.

Generally, a landlord cannot refuse consent to an assignment of the lease solely because the tenant refuses to provide an Authorised Guarantee Agreement (AGA) when the lease does not expressly require it.

Ultimately, whether an AGA is required to ensure the Landlord’s consent, depends on several factors, including:

• Risk assessment by the landlord - the landlord will consider the financial strength of both the assignor and assignee, the complexity of the lease, and the length of the remaining lease term.

• Negotiation between the parties - the outgoing tenant and landlord can negotiate whether an AGA is necessary and, if so, the terms of the agreement.

• Alternative Guarantees - explore alternative forms of security for the landlord, such as a rent deposit or guarantor from a third party.

Key Provisions of an AGA

• Guarantee Scope - a standard AGA typically guarantees all of the assignee's obligations under the lease, including payment of rent, repairs, and other covenants.

• Duration - the AGA usually lasts until the earlier of when the original lease term expires or when the assignee assigns the lease to another tenant with the landlord's consent (a sub-assignment).

• Termination - the AGA may contain provisions for early termination in specific circumstances, such as the assignee becoming insolvent or bankrupt.

Risks for the Tenant

Entering into an AGA, where it might possibly be avoided (see below) can significantly impact the outgoing tenant due to ongoing and uncertain financial Liability. If the assignee breaches the lease covenants and fails to fulfil their obligations, the outgoing tenant becomes liable for damages and potentially legal fees.